February Producer Prices

With the release of February’s Producer Price Index by the Department of Labor we get a sharp reversal of the uptrend that seems to have been developing over the past few months.  At the headline level the PPI fell 0.6%, triple the consensus view.  While several factors led to the decline, a reversal in energy prices was the most dominant.  Still, on a year-over-year basis the headline number is advancing by 4.6%, just 0.4% less than last month.  Since the Federal Reserve’s latest statement showed no signs of inflationary concerns, we turn to the core PPI data to see what underlying trends may be manifesting that would counter what seems on the surface to be a problematic rate of increase.  We find the core PPI (which eliminates food and energy prices) rose just 0.1%, as expected.  This brings the Y/Y rate of increase to 0.9% on a seasonally adjusted basis, slightly softer than last month’s reading, and actually below the Fed’s own target.  Our longer-term outlook for the economic cycle argues for a secular deflation, but that will require both the headline and core PPI data to contract.  While there is no sign yet of that developing, there is also little to suggest rampant inflation is about to break loose.  The only conclusion we can derive from this report is that the Fed can afford to keep interest rates on hold for an extended period, echoing their own press release.